Finance Help: Investment Tips For Beginners
Everyone knows by now that the economy is not doing well and businesses are going down and so it might not be the best time to invest. But is it so? The fact is, there are some very great deals now just because of the fact that the prices are down. So let the professionals offer you these investment tips that can help you profit in a poor economy.
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Investment in the financial markets, if done
in a knowledgeable manner, can yield lucrative levels of return. Such informed
investment-making decisions, are not, however, very easy to take. Financial
planners, with their professional expertise can help beginners in choosing
proper investment policies. Some of the most important tips that financial
advisors provide to newbies regarding investment are:
a)
At
the outset, one needs to realize that there are no set patterns or rules for
investment. Investment decisions depend on the circumstances, market conditions
and can also change with the risk-tolerance levels of investors,
b)
The
exact working procedure of investment procedures needs to be properly
understood before an individual can take investing decisions. All details of
investment transactions should be well-understood too,
c)
Investment
targets and desired rates of return need to be laid down at the start itself.
This facilitates easy formulation of investment policies, including the amount
of money to be invested.
Once the above tips are followed properly, a
new investor needs to follow the following broad principles (as advised by most
financial planners):
a)
Stock Values are more
important than Stock Prices à While low-priced stocks
are attractive, one needs to examine the cause of the low price levels of any
stock. Indeed, in a bullish market, the perpetual low prices of a stock might
indicate that the company that is making financial losses,
b)
Consider the Return
On Net Worth
à Return on net worth is obtained by dividing
after-tax profits by the net worth. Rising levels of return on net worth of a
stock make it a suitable channel of investment,
c)
Risk-diversification à
In order to avoid huge losses at any time, one needs to hold a mix of low,
medium and high-risk stocks. This diversification of risk helps in protecting
the invested amounts,
d)
Stock-price Analysis à
one needs to understand the mechanism via which stock prices are determined.
Future market expectations and projections regarding market conditions play a
large part in determining stock prices,
e)
Tax-paying companies à
an investor has to understand the financial health of a company before (s) he
invests in its stocks. A company that pays high tax levels generally has high
levels of profit, and is of sound financial health, compared to those that pay
little, or no, taxes. Hence, one should invest in stocks of high tax-paying
companies,
f)
Analysis of the Free
Cash Flow
à The reported profits of any company can be
divided in two parts: Cash actually flowing in the company and alterations in
the profit and loss account of a company (via an increase in the number of
debtors). While investing, investors should prefer stocks of companies that
have greater portions of profits going back in its own reserves,
g)
Optimization à
Often, beginners make the mistake of trying to maximize returns by investing in
excessively high-risk stocks. This is uncalled for, and one needs to try to
optimize one’s return, by holding a mix of different types of stocks,
h)
Future prospects of a
company
à While past performance of a company is
extremely important in determining the value of its stocks, what is even more
important is its future prospects. The prices of stocks are, more often than
not, determined by the future prospects of the company. Such prospects, hence,
should be considered more important than past records,
i)
Investing in equities
over time
à In order to obtain the best return from
equities, one should avoid investing the whole amount at one time. Investments
in equities should be done at different suitable times and market conditions.
These tips regarding investment, as suggested
by professional financial planners and advisers, should help beginners
understand the basics of investment and then , to optimize their expected rates
of return.
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